Loan rescheduling drops 81% in Q1 2023

Banks in Bangladesh rescheduled Tk3,376 crore of their defaulted loans in the January-March quarter of this year, marking a significant decrease of nearly 81% compared to the previous quarter, according to data from the Bangladesh Bank.

In the October-December period of 2022, the rescheduled loan amount stood at Tk17,768 crore.

Bankers have noted that the loan rescheduling in the March quarter of this year reflects a normal scene in the banking sector. However, the unusually high increase in December was attributed to the rescheduling of defaulted loans of some large customers.

Additionally, banks engage in rescheduling at the end of the year to maintain clean balance sheets by reducing defaulted loans, they added.

In the October-December quarter of last year, the banking sector experienced a significant decline of Tk13,740 crore in default loans, thanks to a new loan rescheduling policy and relaxed repayment options introduced by the Bangladesh Bank, according to data from the central bank.

During the first quarter of 2023, banks waived interest to the tune of Tk58 crore while rescheduling customer loans, compared to Tk1,898 crore in the October-December quarter of 2022.

An official of the central bank explained that one reason for the increase in rescheduling and interest waivers in December 2022 was the utilisation of this facility by some prominent businessmen.

"Although the customers had availed the facility earlier, they showed the amount in the December quarter due to which the amount was higher. But now the amount of rescheduling and interest waiver is at a normal level," the official explained.

In July last year, the Bangladesh Bank issued a circular empowering bank boards to reschedule new loans on 2.5%-4.5% deposits, eliminating the previous requirement of central bank approval and mandatory deposits ranging from 10%-30% to regularize loans.

Mehmood Hossain, managing director of National Bank, told The Business Standard that the banking sector typically observes an increase in rescheduling during the September and December quarters when the financial capacity of large customers strengthens.

He further explained that if loans are successfully rescheduled in December, the customers are removed from the defaulters' list, providing them another six to nine months with a renewed loan in the new year.

Mehmood also emphasised that banks strive to reduce defaulted loans at year-end to maintain normal balance sheets, and therefore, they are willing to reschedule loans in December.

As of this March, the total default loans in the banking sector amounted to Tk1,31,620 crore, accounting for 8.8% of the total outstanding loans. Additionally, banks have a loan amount of Tk1,66,886 crore owed to them by clients entangled in money loan courts nationwide, with Tk46,719 crore written off.

The International Monetary Fund (IMF) has set performance criteria for the Bangladesh Bank, mandating the formulation of a comprehensive and time-bound non-performing loan (NPL) resolution strategy by June this year to address weaknesses in the bank balance sheets.

The central bank has also committed to the IMF to reduce average NPL ratios to below 10% for state-owned commercial banks and below 5% for private commercial banks by 2026.

Salehuddin Ahmed, a former governor of the Bangladesh Bank, expressed concerns about the increasing rescheduling of loans and the rising trend of loan interest waivers.

He observed that customers are being provided all sorts of concessions and facilities, leading to worsening financial indicators for banks.

"Before sanctioning a loan to a customer, banks should look at various aspects, including the customer's repayment ability, and competence. Banks give loans to whomever they want without looking at these issues. I do not see the will of policymakers and central banks to bring financial discipline." He maintained.

According to the Bangladesh Bank, the amount of loan interest waived by banks increased from Tk1,194 crore in 2018 to Tk2,293 crore in the following year. It slightly declined to Tk1,578 crore in 2020 and then rose again to Tk1,855 crore in 2021.

However, banks waived interest amounting to Tk5,064 crore in 2022. Furthermore, the rescheduled loan amount by banks was Tk29,283 crore last year, nearly double the figure of Tk12,380 crore in 2021. In 2020, the rescheduled loan amount stood at Tk13,468 crore.